{"id":10372,"date":"2022-05-19T19:28:43","date_gmt":"2022-05-19T19:28:43","guid":{"rendered":"https:\/\/taxops.com\/?p=10372"},"modified":"2023-06-23T22:48:34","modified_gmt":"2023-06-23T22:48:34","slug":"asc-740-provisions-a-transaction-primer","status":"publish","type":"post","link":"https:\/\/taxops.com\/asc-740-provisions-a-transaction-primer\/","title":{"rendered":"ASC 740 Provisions: A Transaction Primer"},"content":{"rendered":"\n<div style=\"height:53px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<figure class=\"wp-block-gallery has-nested-images columns-default is-cropped wp-block-gallery-1 is-layout-flex wp-block-gallery-is-layout-flex\">\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"1024\" height=\"417\" data-id=\"12015\" src=\"data:image\/gif;base64,R0lGODlhAQABAIAAAAAAAP\/\/\/yH5BAEAAAAALAAAAAABAAEAAAIBRAA7\" data-src=\"https:\/\/taxops.com\/wp-content\/uploads\/2023\/06\/ASC-740-A-Transaction-Primer.png\" alt=\"\" class=\"wp-image-12015 lazyload\" data-srcset=\"https:\/\/taxops.com\/wp-content\/uploads\/2023\/06\/ASC-740-A-Transaction-Primer.png 1024w, https:\/\/taxops.com\/wp-content\/uploads\/2023\/06\/ASC-740-A-Transaction-Primer-980x399.png 980w, https:\/\/taxops.com\/wp-content\/uploads\/2023\/06\/ASC-740-A-Transaction-Primer-480x195.png 480w\" sizes=\"(min-width: 0px) and (max-width: 480px) 480px, (min-width: 481px) and (max-width: 980px) 980px, (min-width: 981px) 1024px, 100vw\" \/><noscript><img decoding=\"async\" width=\"1024\" height=\"417\" data-id=\"12015\" src=\"https:\/\/taxops.com\/wp-content\/uploads\/2023\/06\/ASC-740-A-Transaction-Primer.png\" alt=\"\" class=\"wp-image-12015 lazyload\" srcset=\"https:\/\/taxops.com\/wp-content\/uploads\/2023\/06\/ASC-740-A-Transaction-Primer.png 1024w, https:\/\/taxops.com\/wp-content\/uploads\/2023\/06\/ASC-740-A-Transaction-Primer-980x399.png 980w, https:\/\/taxops.com\/wp-content\/uploads\/2023\/06\/ASC-740-A-Transaction-Primer-480x195.png 480w\" sizes=\"(min-width: 0px) and (max-width: 480px) 480px, (min-width: 481px) and (max-width: 980px) 980px, (min-width: 981px) 1024px, 100vw\" \/><\/noscript><\/figure>\n<\/figure>\n\n\n\n<div style=\"height:53px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\"><em><em><em><em><em>Tax provisions under ASC 740 are difficult to manage, but understanding how and when to report them is half the battle.<\/em><\/em><\/em><\/em><\/em><\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">By <a href=\"https:\/\/www.linkedin.com\/in\/stacey-roberts-90072b5\/\" target=\"_blank\" rel=\"noreferrer noopener\" title=\"\">Stacey Roberts<\/a> and <a href=\"https:\/\/www.linkedin.com\/in\/meredith-smith-047aa13\/\" target=\"_blank\" rel=\"noreferrer noopener\" title=\"Meredith Smith\">Meredith Smith<\/a><\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\">What businesses need tax provisions and when do they need them?<\/h2>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\">When a public company registered with the SEC or trading on any type of stock exchange may owe taxes down the road, and this tax liability is uncertain but probable, it needs to be disclosed as a contingent liability. Under ASC 740, these companies are required to file a tax provision letting investors know about potential, material tax impacts on financial statements. This reporting is mandatory.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The best option for companies to meet this obligation is to start building tax provisions 18-24 months before transactions such as going public in an Initial Public Offering (IPO) or a Special Purpose Acquisition Company (SPAC). Provisions are reported quarterly and must be comparable to previous quarters. As a result, building and reporting tax provisions is easier to do concurrently than retrospectively.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Companies in contention for sale are best served by building a provision history early, at least 12 months before selling. This will help ease the selling process, improve company value, and fulfill a potential banking requirement. Buyers will usually ask for deferred tax assets, tax payables and tax receivables. With a provision set up, this should be a quick and easy answer for the selling business.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Another benefit of setting up a provision is that the company will seem more valuable by recognizing deferred tax assets. These assets are usually overlooked or undervalued if a company does not build a tax provision.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Finally, the buyer can require a company to issue relevant financial statements. This is both a bank and tax requirement. Setting up the provision will satisfy a piece of those requirements.<\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\">What is ASC 740?<\/h2>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\">ASC 740 has a lot of nuances, but oversimplified, this subgroup of accounting rules defines the threshold for recognizing deferred tax assets (future benefit) or deferred tax liabilities (future detriment).<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Because of the focus on assets and liabilities, ASC 740 largely pertains to the balance sheet and the changes in taxes payable and receivable over multiple periods. What is left over from period to period on the balance sheet is expensed.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">One important thing to note is that franchise taxes, those based on equity, are not part of an ASC 740 current tax provision.<\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\">How does ASC 740 vary across states?<\/h2>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\">The minutia of ASC 740 changes from state to state. In Texas, margin tax is an income tax for ASC 740 purposes despite not being listed as an income tax elsewhere.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Meanwhile, states like Washington report business and occupation tax as an income tax, while overlooking margin tax entirely. North Carolina legislation is considering getting rid of income tax altogether.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This creates a discrepancy between reporting for federal purposes and reporting for state purposes.<\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\">How to handle the changing legislation of ASC 740?<\/h2>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\">When it comes to tax returns, most mistakes can be amended. This is not true for reporting for ASC 740. If there is a mistake on your provision, you will potentially have to reissue your financial statements, which introduces a lot of new problems.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This makes it even more important to be aware of legislative changes in the filing process. If the apportionment factor or another coefficient shifts, your blended deferred tax rate will need to reflect that change.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Because of this changing legislative landscape, filing a tax provision should be a process that is updated yearly despite consistent income or growth. This does not mean to completely move on from the prior year\u2019s apportionment, but it does mean that taxpayers must adjust those numbers to fit the current year\u2019s tax rates.<\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\">What are some best practices?<\/h2>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\">Like with all taxes, the most important thing is to keep track of company activity. If a company had a big sale in a new state, that would need to be factored into your deferred tax rate and auditors will notice if this sale is misrepresented in your provision.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Despite tax returns being frequently overlooked, your return to provision accruals that will run through next year are reliant on correctly filed returns. If there is something missing on a return, auditors will start questioning the validity of your business.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Taxpayers who build a solid working relationship with auditors can ease this process. It is easy for a combative relationship to form between a company\u2019s tax department and auditors but trying to maintain a healthy partnership will be a great help when amending issues with your reporting. While auditors can\u2019t tell you how to do your provision, they can vet your provision positioning to help mitigate potential problems with your reporting.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">For more guidance, reach out to the tax professionals at <a href=\"https:\/\/taxops.com\/\" target=\"_blank\" rel=\"noreferrer noopener\" title=\"TaxOps.com\">taxops.com<\/a>.<\/p>\n\n\n\n<div style=\"height:50px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/taxops.com\/contact\/\" target=\"_blank\" rel=\"noreferrer noopener\">Let&#8217;s Talk Tax<\/a><\/div>\n<\/div>\n\n\n\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\">More Tax News<\/h3>\n\n\n<ul class=\"wp-block-latest-posts__list wp-block-latest-posts\"><li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/taxops.com\/auditor-independence-in-the-age-of-private-equity\/\">Auditor Independence in the Age of Private Equity: What CFOs Need to Know<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/taxops.com\/r-d-credits-for-software-companies\/\">R&amp;D Credits for Software Companies: Scrum Teams, Qualifiers, and Section 174 After OBBBA<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/taxops.com\/section-174-decoupling-what-tax-pros-need-to-know-state-by-state\/\">Section 174 Decoupling: What Tax Pros Need To Know State By State<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/taxops.com\/sean-espy-new-partner\/\">TaxOps Welcomes Sean Espy as Partner, Tax Minimization<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/taxops.com\/state-nexus-demystified-navigating-tax-compliance-after-wayfair-episode-1-2\/\">Your Tax Footprint Is Probably Bigger Than You Think: What Finance Leaders Need to Know About State Nexus<\/a><\/li>\n<\/ul>\n\n\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/taxops.com\/contact\/#subscribe\" target=\"_blank\" rel=\"noreferrer noopener\">Subscribe to Tax News<\/a><\/div>\n<\/div>\n\n\n\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Tax provisions under ASC 740 are difficult to manage, but understanding how and when to report them is half the battle. By Stacey Roberts and Meredith Smith What businesses need tax provisions and when do they need them? When a public company registered with the SEC or trading on any type of stock exchange may [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":12015,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"off","_et_pb_old_content":"<!-- wp:spacer {\"height\":\"53px\"} -->\n<div style=\"height:53px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->\n\n<!-- wp:gallery {\"linkTo\":\"none\"} -->\n<figure class=\"wp-block-gallery has-nested-images columns-default is-cropped\"><!-- wp:image {\"id\":10182,\"sizeSlug\":\"large\",\"linkDestination\":\"none\"} -->\n<figure class=\"wp-block-image size-large\"><img src=\"https:\/\/taxops.com\/wp-content\/uploads\/2022\/04\/Texas-High-Court-Clarifies-Service-Receipt-Apportionment-1-1024x536.png\" alt=\"\" class=\"wp-image-10182\"\/><\/figure>\n<!-- \/wp:image --><\/figure>\n<!-- \/wp:gallery -->\n\n<!-- wp:spacer {\"height\":\"53px\"} -->\n<div style=\"height:53px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->\n\n<!-- wp:quote -->\n<blockquote class=\"wp-block-quote\"><p><em><em>The Texas Supreme Court has ruled in favor of apportioning service receipts to the location of personnel or equipment, a position providing clarity to taxpayers on whether to source receipts from services performed versus where customers are at.<\/em>&nbsp;<\/em><\/p><\/blockquote>\n<!-- \/wp:quote -->\n\n<!-- wp:quote -->\n<blockquote class=\"wp-block-quote\"><p><\/p><\/blockquote>\n<!-- \/wp:quote -->\n\n<!-- wp:paragraph -->\n<p>By <a href=\"https:\/\/taxops.com\/tram-le\/\" target=\"_blank\" rel=\"noreferrer noopener\" title=\"Tram Le\">Tram Le<\/a> <\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>On March 25, 2022, the Texas Supreme Court held in favor of the taxpayer that services revenue is apportioned to the location where services are performed, consistent with Texas law.<sup>1<\/sup> The Court found that the performance of service is located where the taxpayer\u2019s personnel or equipment is physically doing useful work for the customer.&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>The case involves Sirius XM (Sirius XM Radio, Inc. v. Hegar, Tx. Sup. Ct. No. 20-0462 (3\/25\/22)), whose headquarters, transmission equipment and production studios used in providing a subscription-based satellite radio service are largely located outside of Texas. In the 2010 and 2011 tax years, Sirius XM apportioned tax based on costs of activities in Texas and outside of Texas. Under Texas rules, service revenue is apportioned to Texas based on the \u201cfair value of the services\u201d rendered in Texas where services are performed in more than one state.<sup>2<\/sup>&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>For those tax years, the Texas Comptroller adjusted on audit to base the tax on the percentage of Sirius XM\u2019s Texas subscribers. The Comptroller argued that service revenue is sourced to Texas if the \u201creceipt-producing, end-product act\u201d takes place in Texas. In this case, such an act was considered the decryption of the satellite network and enabling of each subscriber\u2019s radio to receive Sirius XM\u2019s signal. However, Sirius XM argued that its services \u2013 the production and broadcasting of radio content \u2013 was mainly performed outside of Texas.&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>The Texas Supreme Court ultimately agreed that Sirius XM was providing satellite radio content and those services are performed in Texas if the labor employed in that service is doing the work in Texas. This constitues a natural reading of the law, which requires taxes due \u201cwhere service [is] performed in this state.\u201d This rejects the Comptroller premise of service taking place at the customer location. The Court also rejected the use of the \u201creceipt-producing, end-product\u201d test to determine where a service is being performed.&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>Although the Court ruled in favor of the taxpayer, the case was remanded to the Appellate court for further review of Sirius XM\u2019s cost of performing services and evidence to support its \u201cfair value of services\u201d performed in Texas.&nbsp;&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>The Texas Supreme Court opinion provides clarification in apportioning service revenue in Texas and determining whether services are performed in the state. Taxpayers doing business in Texas should carefully review business operations, nature of services, i.e., properly characterizing the services provided to customers and location of equipment, facilities, and personnel to properly apportion revenue.&nbsp;&nbsp;&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>In addition, if services are being performed in Texas and outside of Texas, taxpayers must properly evaluate methods of determining the fair value of services and maintain sufficient evidence to support what revenue is apportioned to Texas. Contact a TaxOps advisor is you need assistance assessing nexus and taxability in the state of Texas and everywhere you do business.&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>Tram Le is a member of the SALTovation team at TaxOps and an adjunct professor at the University of Texas at Arlington. She writes about hot topics in state and local tax affecting business operations and growth strategies and the Spreading SALTovation column for Tax Notes.&nbsp;Reach out to Tram at <a href=\"mailto:tle@taxops.com\" target=\"_blank\" rel=\"noreferrer noopener\" title=\"Tram Le\">tle@taxops.com<\/a>.&nbsp;&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:spacer {\"height\":\"53px\"} -->\n<div style=\"height:53px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->\n\n<!-- wp:buttons -->\n<div class=\"wp-block-buttons\"><!-- wp:button -->\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link\" href=\"https:\/\/taxops.com\/contact\/\" target=\"_blank\" rel=\"noreferrer noopener\">Let's Talk Tax<\/a><\/div>\n<!-- \/wp:button --><\/div>\n<!-- \/wp:buttons -->\n\n<!-- wp:spacer {\"height\":\"47px\"} -->\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->\n\n<!-- wp:heading {\"level\":3} -->\n<h3>More Tax News<\/h3>\n<!-- \/wp:heading -->\n\n<!-- wp:latest-posts \/-->\n\n<!-- wp:spacer {\"height\":\"47px\"} -->\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->\n\n<!-- wp:buttons -->\n<div class=\"wp-block-buttons\"><!-- wp:button -->\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link\" href=\"https:\/\/taxops.com\/contact\/#subscribe\" target=\"_blank\" rel=\"noreferrer noopener\">Subscribe to Tax News<\/a><\/div>\n<!-- \/wp:button --><\/div>\n<!-- \/wp:buttons -->\n\n<!-- wp:spacer {\"height\":\"47px\"} -->\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->","_et_gb_content_width":"","spt_transcript":"","footnotes":""},"categories":[229,226],"tags":[252,970,284,126,969,953,265,913,30,80,971,964],"class_list":["post-10372","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-state-and-local","category-tax-news","tag-accountant","tag-balance-sheet","tag-cfo","tag-cpa","tag-defferedtax","tag-entity-structure","tag-finance-professional","tag-new-tax","tag-state-and-local-tax","tag-tax-provider","tag-tax-remediation","tag-tax-service"],"aioseo_notices":[],"jetpack_featured_media_url":"https:\/\/taxops.com\/wp-content\/uploads\/2023\/06\/ASC-740-A-Transaction-Primer.png","_links":{"self":[{"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/posts\/10372","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/comments?post=10372"}],"version-history":[{"count":3,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/posts\/10372\/revisions"}],"predecessor-version":[{"id":12016,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/posts\/10372\/revisions\/12016"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/media\/12015"}],"wp:attachment":[{"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/media?parent=10372"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/categories?post=10372"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/tags?post=10372"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}